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Ruling

Subject: GST and the subdivision and sale of property

Question 1

Is the sale of subdivided land a taxable supply?

Answer

The sale of the subdivided land is a taxable supply.

Relevant facts and circumstances

This ruling is based on the material facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an equal joint owner of vacant land. You inherited the land from your late mother. The land was acquired by her post 20 September 1985.

An application for subdivision of the land was lodged with the City Council prior to the death of your mother. The application was instigated by your mother and her children. A planning permit allowing a staged subdivision was issued shortly after her death.

You now intend to arrange the subdivision of the land and to sell all lots in stages in accordance with the terms of the planning permit. You will not directly engage in the subdivision and sales activity. You will engage a private company under the control of yourself and your siblings to attend to all subdivision and sales activity (referred to here as the "associated development company").

The company was a pre-existing company. In addition to the property development, it currently also manages a commercial rental property.

You will engage the associated development company under a formal contract. The formal contract has been drafted and ready to be executed by the parties. The key terms of this contract are:

a. The associated development company will be appointed to carry out the sub-division. It will engage all necessary contractors, and pay all subdivision related costs.

b. The associated development company will be empowered by way of power of attorney to negotiate and conclude sales of the land on behalf of the taxpayers.

c. You will continue to be liable for and pay usual landholding outgoings such as council rates and land taxes.

d. The associated company will bear all commercial and legal liability risks associated with the subdivision.

e. You will receive an agreed amount of proceeds for the sale. That amount is reflective of the current pre- subdivision market value of the land.

f. The balance of the sale proceeds will be received by the associated development company as its fee for undertaking the subdivision and sales activities; and

g. The associated development company will not act as an agent for you in relation to matters associated with the subdivision of the land. It will be conducting a separate and independent enterprise of providing land subdivision and sales services to the taxpayers for a fee.

The land was zoned residential at the time of the application for subdivision. No re-zoning will be necessary to carry out the subdivision and sales of the land.

You have not previously subdivided and sold part land.

Your vocation does not involve dealings in real property of any kind. You will have no direct personal involvement in the subdivision and sale activity.

The land was valued by a professional valuer. That valuation was on an "as-is" basis prior to the commencement of any subdivision works.

The total anticipated subdivision and sale costs are to be incurred by the associated development company. The associated development company will engage engineers, surveyors, construction contractors, and other professionals as required from time to time.

The majority of the associated company's funding will be sourced from proceeds from the sale of lots. Some additional short term funding may be required to be sourced externally.

In the first instance the consideration received in respect of the subdivision will be applied against the costs of the subdivision and cash will be used to reduce and ultimately eliminate the debts of the company. Any profits will be taxed and accumulated within the company. It is uncertain at this stage what will ultimately happen with the retained profits; they may be reinvested into further land or other income producing investments or be paid out as dividends to the company's shareholders.

Some subdivision works have commenced and some pre-sales stage 1 lots have been concluded.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 7-1

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Section 195

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-20(2)(c)

Income Tax Assessment Act 1997 Section 995

A New tax System (Australian Business Number) Act 1999 Section 41

Reasons for decision

Section 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that GST is payable on taxable supplies and taxable importations.

Section 9-5 of the GST Act states:

9-5 Taxable Supplies

You make a taxable supply if:

(a) you make a supply for consideration; and

(b) the supply is made in the course or furtherance of an enterprise that you carry on; and

(c) the supply is connected with Australia: and

(d) you are registered or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

In this instance you are making a supply for consideration and the supply is connected with Australia. We need to now determine if the supply is made in the course of carrying on an enterprise that you carry on and if you are required to be registered for GST.

Section 9-20 of the GST Act defines the term enterprise in broad terms. Relevantly the GST Act provides that:

(1) an enterprise is an activity or series of activities, done

(a) in the form of a business; or

(b) in the form of an adventure or concern in the nature of trade; or

(c) on a regular basis, in the form of a lease, licence or other grant of an interest in property.

The term carry on in relation to an enterprise is described in section 195 of the GST Act as follows:

Carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise.

Paragraph 9-20(2)(b) of the GST Act provides that an enterprise does not include an activity, or series of activities done as a private recreational pursuit or hobby.

Paragraph 9-20(2)(c) of the GST Act provides that an enterprise does not include an activity, or series of activities done by an individual or partnership without reasonable expectation of profit.

Enterprise

Miscellaneous Tax Ruling MT 2006/1 (MT 2006/1), provides that enterprise is defined in section 41 of the A New Tax System (Australian Business Number) Act 1999 (ABN Act), to have the same meaning given by section 9-20 of the GST Act.

MT 2006/1 at paragraph 150 provides guidance in relation to enterprise.

Paragraph 150 states:

150. Section 9-20 of the GST Act provides that an enterprise is an activity, or a series of activities, done:

(a) in the form of a business; or

(b) in the form of an adventure or concern in the nature of trade; or

(c) ……

The main principles from MT 2006/1 which are relevant to the present circumstances include:

In the Form of a Business

The GST Act definition of business in section 195-1 of the GST Act is identical to that in section 995 of the Income Tax Assessment Act 1997 (ITAA 1997). That definition states:

Business includes any profession, trade, employment, vocation or calling but does not include occupation as an employee.

Whilst there is no single test of whether a business is being carried on, Taxation Ruling TR 97/11 (TR 97/11), provides the main indicators of carrying on a business. These indicators include:

§ a significant commercial activity;

§ the purpose and intention of the taxpayer in engaging in the activity;

§ an intention to make a profit from the activity;

§ the activity is or will be profitable;

§ repetition and regularity of activity; and

§ the activity is organised and carried on in a businesslike manner.

Whether a business is being carried on is generally the result of a process of weighing all the relevant factors.

If all the relevant factors of a business are not satisfied we also need to consider the extended definition of enterprise and whether these activities fall in the form of an adventure or concern in the nature of trade.

White J in Toyoma Pty Ltd v Landmark Building Developments Pty Ltd 2006 ATC 4160 said at [69]:

Further, the activity or series of activities, which they carried on, was done in the form of business. The words in the form of have the effect of extending the meaning of enterprise beyond entities carrying on a business, to encompass activities that have the appearance or characteristics of business activities.

MT 2006/1 at paragraph 170 states:

The definition clearly includes a business and the use of the phrase in the form of indicates a wider meaning than the word business on its own. This occurs in the case of non-profits entities. In such instances the Commissioner considers that not all of the main features of business such as the capacity of earn and distribute profits, need to be present before an activity has the form of a business.

In the form of an adventure or concern in the nature of trade

MT 2006/1 provides guidance on the meaning of this expression.

An adventure or concern in the nature of trade refers to transactions that have a commercial nature which are entered into for a profit making purpose.

Paragraph 237 of MT 2006/1 states:

237. The term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a business deal, See McClelland v Federal Commissioner of Taxation, in which Lord Donovan, delivering the opinion of the majority said:

It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'.

Paragraph 6 in Taxation Ruling 92/3 (TR 92/3) provides that whether a profit from an isolated transaction is income depends very much on the circumstances of the case.

Paragraph in 13 TR 92/3 provides that

13. Some matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following:

(a) the nature of the entity undertaking the operation or transaction

(b) the nature and scale of other activities undertaken by the taxpayer

(c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

(d) the nature, scale and complexity of the operation or transaction

(e) the manner in which the operation or transaction was entered into or carried out

(f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

(g) if the transaction involves the acquisition and disposal of property, the nature of that property, and

(h) the timing of the transaction or the various steps in the transaction.

Miscellaneous Tax ruling MT 2006/1 also discusses isolated transactions and sales of real property and at paragraph 265, it presents a list of factors which, if present, may be an indication that a business or an adventure or concern in the nature of trade is being carried on. Those factors are:

§ there is a change of purpose for which the land is held;

§ additional land is acquired to be added to the original parcel of land;

§ the parcel of land is brought into account as a business asset;

§ there is a coherent plan for the subdivision of the land;

§ there is a business organisation - for example a manager, office and letterhead;

§ borrowed funds financed the acquisition or subdivision;

§ interest on money borrowed to defray subdivisional costs was claimed as a business expense;

§ there is a level of development of the land beyond that necessary to secure council approval for the subdivision; and

§ buildings have been erected on the land.

Paragraph 266 in MT 2006/1 provides further guidance in determining whether activities relating to an isolated transaction are an enterprise or the mere realisation of a capital asset and states:

266. In determining whether activities relating to an isolated transaction are an enterprise or the mere realisation of a capital asset, it is necessary to examine the facts and circumstances of each particular case. This may require a consideration of the factors outlined above, however there may also be other relevant factors that need to be weighed up as part of the process of reaching an overall conclusion. No single factor will be determinative as to the character of the activities.

In this instance, the following facts have been considered:  

§ You have not been involved in any other land development previously

§ When the you inherited the land, an application for subdivision had already been lodged with the local council

§ Borrowings play a significant role in financing the development, at least in the short term

§ The development is significant in scale

§ It can be said that the activity has a significant commercial component and that there is an intention to make a profit.

§ The total anticipated costs of the subdivision are greater than the undeveloped market value of the property

§ The subdivision involves an arrangement whereby the consideration for the blocks sold will be received by a company associated with the taxpayers which will make disbursements of those funds in part to the taxpayers and retain the balance for possible subsequent disbursement to several discretionary trusts of which the taxpayers are beneficiaries

The way in which the subdivision is planned shows some of the indica of a business and of an adventure or concern in the nature of trade.

The land had been acquired by you from a deceased estate. It has been your intention to dispose of the property since the acquisition. Whilst there is only one previous history of land development, the arrangement employed is relatively sophisticated, involving the interposition of a company as recipient of the sale receipts.

The expenditure incurred goes beyond the minimum required to realise the asset and in fact may involve significant short-term borrowings.

Based on these facts it would seem that the project is an undertaking on a sufficient scale to take it beyond the realms of a mere realisation of an asset and characterise it as a commercial undertaking.

It is therefore considered that the subdivision and sale of the land will be an enterprise for the purposes of the GST Act.

Each of the requirements of section 9-5 of the GST Act are met as you will be making a supply for consideration, the supply is connected with Australia, the supply is made in the course of carrying on an enterprise and you are required to register for GST.